Monday Morning Update

I’ve been toying with selling a little more from my stock indices positions over the weekend. By both overbought and overbullish measures, stock indices as a whole are frothy. Furthermore, we saw a potential lunar cycle inversion, with stocks ultimately rising into Saturday’s full moon. Combined with the previously noted 5-model alignment for a January swing top and economic surprises having possibly topped out, I have a case here for stocks now reversing. However, Friday produced a bullish breakout in the Dax, treasury yields and Euro-USD, which would need really to be reversed today/tomorrow if the weekend was to mark a swing top. Furthermore, leading indicators are still overall supportive for pro-risk (ECRI US rose again, as did CB US leading indicators, and Markit PMI readings for US, Europe and China all rose), and narrow leading money points to economic strength into Spring. As I have previously stated, I do not believe this is the cyclical stocks bull top, but that a pullback then a push on to a higher high on weakened internals and negative divergences is needed, likely by mid-year.

Some charts to demonstrate. Here we see two overbought and overbullish indicators for US stocks:

Source: Index Indicators

Source: Bespoke

The excesses are clear and I suggest the rally is on borrowed time. However, note in both cases that the two indicators for previous swing tops first oscillated and rounded out in the extreme zone before stocks topped. I therefore wonder whether stocks will continue to rally for a further 2 weeks in the new moon, or whether they might even continue through to March/Spring, with some back and forth en-route. I don’t know.

If we draw in the FTSE, it is on an unsustainable trajectory, and the Shanghai Composite appears to be rolling over for a consolidation ahead. Plus the Nikkei tried to break out at the end of last week but remains within the zone of a continued potential rounded top.

Chris Puplava suggests stocks and major economy economic surprises should top out by Spring, using oil prices as a lead indicator.

Source: PFS Group

Based on stock market history I have previous predicted a price overthrow to end the cyclical stocks bull. Here is the SP500 chart and the overthrow in 2007 above the cyclical bull resistance line can be seen. In the current cyclical bull we are at such a resistance and I am suggesting an overthrow beyond it is likely to complete the bull.

However, of course that resistance is another reason why stocks could take a breather now before making such action. If the overthrow occurs, then Laslo Birinyi’s work models it at around 1600, and Will Preston gets 1580. That would make a marginal secular nominal high for the SP500 secular stocks bear and there is some allure in that to fooling investors once again that we are in a new long term bull market before a cyclical bear actually occurs. It’s a target clearly within reach now either in a continued advance to Spring, or a pullback here and then a final high around June time.

OK, I decided to stay put with my positions and not make any sale this morning. I see good reasons for a pullback here with the dual-frothiness but also reasons to push a little higher yet. We may have made a lunar inversion top at the weekend, or we may squeeze out further gains into mid-Feb. I don’t see the cyclical bull top here so I’ll take my chances and if we see a swing top here I expect stocks to come again into mid-year.

Precious metals and miners continue to be depressed, though there remains evidence for a base in both (oversold, overbearish). The gold chart below shows a large triangle, and it’s important for gold not to lose the lower trend line.

I believe this is all part of the last wash out of weak hands before the secular finale, in a patience-testing coil. To aid gold’s case, a pick up in inflation would put real interest rates further negative. As oil has made a decent up move recently, we could be at the start of such a process. But we still need that momentum move into wider commodities, and for commodities to start to outperform equities, for an acceleration in inflation and a scamper to hedge in precious metals.

I will respond to comments and emails over the next few days. Currently in Yala, Sri Lanka, but moving to a resort for a few days on the south coast.

These patterns have not been completed, but they are something to keep an eye on – combined with lunar sequencing, both charts could suggests a downturn to the lower trendlines on each chart from here. Something to keep an eye on anyway, especially with market leading stock Apple having recently ‘fallen from the tree’.

Hi, John. Don’t know if you are familiar with 13,5 month cycle in gold, but at the moment we are in unfavorable period for precious metals. Agree with you, consolidation is to continue and we are not likely to see important low until may, especially in the case of silver. I also think that inflationary finale is to happen in 2014, so, gold should start its cyclical bull in full motion in march-may period and continue next year. Another reason to be bullish is German election in Autumn this year. I won’t be surprise to see a big sell-off in Euro, then gold should be a safe heaven in such conditions. What do you think?

Hi Vlad, thanks for your thoughts. At the moment the situation is risk-on but not yet inflation-on, so gold isn’t gaining any purchase as either an inflation hedge or safe haven. By my analysis gold is overdue beginning its acceleration (just the beginning of the acceleration), but we need a change in that risk/inflation situation as a catalyst. But will cover this kind of area in more detail shortly.

Do you have any ideas on why the lunar cycle sometimes inverts, what the factors would be that would cause this? Also, once you get a lunar inversion, how likely is it to continue? To rephrase that question, how many lunar periods is an inversion likely to last after it begins?

Something I’ve wondered about: Stocks were strong during the lunar period that is normally weak for stocks, so now that we’ve moved into the period that is normally bullish for stocks, we would expect stocks to make a strong move to the upside, right? This flies in the face of the inversion logic though, ergo, my questions above.

Prior to the recent inversion, inversions for the past year were linked with eclipses. I think liquidity simply swamped the latest moon phase. Fed MBS purchases do not settle steadily but in chunks around the middle of the month. Over $85 billion in QE3 MBS, reinvested MBS, and POMOs settled between 1/14 and 1/22. Also there was greatly diminished Treasury issuance due to the debt ceiling. Combine the two and last week will probably be the high point for liquidity in a single week unless the debt ceiling returns. Contrast that with this week when Treasury will auction over $160 billion, while there should be no MBS settling and less than $10 billion in POMOs.

Musings on cycle inversions here (and in the comments):http://solarcycles.net/2012/05/22/cycle-inversion/
Remains an open item. If it’s an inversion, stocks should straight away retreat. If it’s an overriding of lunar related negative sentiment by other factors then on we go.

John
In your opinion, if the S&P does reach the higher high around mid year and then goes down, will China, Japan, Turkey, Brazil, etc. stock markets also go down? Or is there sufficient decoupling for the emerging markets to go higher on their own without a rising USA stock market?
Jack

At the last cyclical stocks top, equities in different countries peaked out over a course of 6 months, and commodities peaked out 6 months after equities, broadly speaking. So I expect leaders and laggards again.

Sentiment is a bit confusing to read at the moment. Some say the equities rally is overbought, whilst others argue it’s just the start of a full blown secular bull market for stocks. Rob Prechter believed when people lost all faith in equities, as was the case in 1979 (when a magazine had “The Death of Equities” as a cover story), that was the point to get into stocks.

This theory would indicate that nowadays, equity bulls are complacent, suggesting a top is imminent. Whether an all-time high in markets in 2013 takes place, I can’t help but wonder, what if the secular bull in stocks was a stealth bull market, which is already begun. Surely the cause of the next major correction would be the raising of interest rates when US Unemployment falls below 6.5% at some point in the decade, possibly between 2015-18, assuming economic growth is steady and constant, by which time all new highs may have already been established.

In various ways, I believe the new secular bull market in stocks began in 2009, with history as our guide. That should be the nominal low, the next cyclical bear should be shallow, and we have been in a gradual process of repair since 2009 which should continue. But in inflation adjusted and p/e terms, the secular bull should begin after the next cyclical bear. So there are two ways of looking at it, but both will be verified if the next cyclical bear is shallow, certain country p/es make a new low and stocks gain momentum thereafter.

I still hold that we dip only a bit in mid feb in the next weak lunar period. Then we rally towards the summer where you have the sun spot peak together with all sorts of astro stuff. Real crash i.e. largest leg down in sept or oct. ;). Problem with oversold indicators is that they can get stuck a bit and then let go and rally even harder and then crash. Protecting myself with puts as always. No need to predict.

Just noticed several visitors to my blog coming from this site. A quick comment. This isn’t a lunar cycle inversion yet. In the previous strong lunar period the Nasdaq went up 99 points, in the current weak lunar period it is up only about 30 points. That’s what you get when the market is in an upswing, it still rises in the weak lunar periods, but more hesitating. That’s just a sign of ongoing strength, and is usually followed by more gains in the next strong lunar period. The same happened last year, there wasn’t any negative lunar period until late March, but the gains in the strong lunar periods exceeded the gains in the weak lunar periods.

Hi Danny, thanks. I generally agree – the moon influences sentiment, but other factors can override from time to time. We saw some back and forth last week pre full moon – the hesitancy to which you allude – and maybe that’s all we get.

In reference to your comment above, is there an easy way for an investor to track and aggregate all the activities of the Fed you mention? Is the source data taken from http://www.newyorkfed.org or somewhere else?

Auction data comes from Treasury Direct. All other data comes from NY Fed or sites which that site directs you to. MBS settlement dates are not specified and have to be determined after the fact by comparing the month designated for settlement (which is specified) and then finding the weekly figures which show how much MBS the Fed settled the previous week.

MBS settlement dates are THE most important aspect of current QE. They should simply be specified upon or prior to occurence, but as not there is no easy way except digging through the above sites.